On Monday, Bank of England Governor Andrew Bailey bemoaned that the outlook for the British economy is the worst he’s ever seen. Similar to the recent forecasts from the Office of Budget Responsibility, the Bank’s own prognosis expects next-to-zero economic growth over the next couple of years.
Britain may be in bad shape, but it’s hardly alone. All Western countries are grappling with the challenge of trying to sustain a social contract that was created in a more economically dynamic time. When public pensions and health care were created, only about a twentieth of the population were retired, people didn’t live much past 70, and the great productivity boom of the postwar period lay ahead.
Fast forward to today and the very success of that welfare state in lengthening lives has meant that many people live decades beyond retirement — which gives them more time to develop the health ailments and vulnerabilities the health system must deal with. With a fifth of the population now retired, maintaining such a welfare state requires the remaining workforce to be more productive than ever.
Unfortunately, the productivity boom of the postwar period didn’t last. Productivity growth has been trending downwards for decades, and shows no sign of relenting. That means demand for government largesse is growing faster than the new supply of resources.
As a result, either governments raise taxes to cover these rising costs, raise economic growth, or cut spending elsewhere. The last one is not easy. What’s often said of the United States government — that it’s an insurance company with an army — is true of all Western governments: once you rope off the key elements of the social contract, like pensions and health care, then add in the minimal functions of government, like basic law and order, there’s not a great deal left to cut.
That’s why, even during the austerity of the Osborne years, Britain’s debt kept rising. But the country’s growth performance remained underwhelming, with the country’s GDP per capita actually declining since the financial crisis. In part that’s because you have to spend money to make money. As the US’s ongoing experiment with Bidenomics reveals, investment in infrastructure and research and development are often needed to create an environment attractive to private investors. Those countries that have instead chosen to prioritise fiscal prudence and allowed infrastructure to decay, like Britain and Germany, have delivered the most unimpressive economic performances.
To add to its woes, Britain has scored a number of own goals in the last few years. The stop-start policy-making of the last few years combined with instability in the government, has hardly encouraged businesses to ramp up investment. Meanwhile trade opportunities have lagged — the latest damp squib identified by the OBR being the country’s entry into the Trans-Pacific Partnership, which it expects will barely budge the country’s growth rate.
Unless the UK wants to engage in an American-style debt binge, it will have to choose whether to build the economy of the future or cling to the social contract of the past. Because at the moment, Britain appears to be eating into its future growth to support its present consumption.